High oil prices a risk to global economy, says IMF

High and volatile oil prices pose a "significant" risk to the global economy, with a one in five chance that the cost of crude could rise above $80 a barrel by the end of the year, the International Monetary Fund warned yesterday.

In its half-yearly health check of the world economy, the fund highlighted dearer energy as one of a number of threats to the robust performance of recent years. The IMF's chief economist, Raghuram Rajan, said: "Higher oil prices are a clear and present danger." Recent increases had been driven by supply shortfalls and potential future shortages, he added.

Oil prices rose again yesterday, to above $68 a barrel for US light crude at one point, as the market fretted about the growing threat from Hurricane Rita, which is heading towards the US Gulf coast only three weeks after Hurricane Katrina wrecked New Orleans. That is not far short of the all-time high of $70.85 hit in the immediate aftermath of Katrina.

There were signs, the IMF said, that consumer confidence was being adversely affected and inflationary pressures were being stoked up by high oil prices.

"To date, the impact of higher oil prices on global growth has been surprisingly moderate, in part reflecting the fact that higher oil prices have owed much to strong global demand as well as relatively well-anchored inflationary expectations," the fund said in its World Economic Outlook.

"With recent oil price increases owing less to demand pressures, further price increases could have a less benign impact." The IMF said it had revised its forecasts for oil prices from $46.50 a barrel to $54.23 this year and from $43.75 to $61.75 in 2006. Since crude prices started to rise in 2003, the fund estimates that global GDP has been reduced by a cumulative 1%-1.5%, with every 10% increase in oil prices associated with a 0.1% to 0.15% reduction in growth.

The impact could be doubled in the future, if oil prices fed through into higher inflation, forcing central banks to raise interest rates, or if consumers tightened their belts. The WEO predicted that global growth this year - driven mainly by the US and China - would be 4.3%.

Mr Rajan said: "A number of developments concern us. These include the excessive dependence of global demand on consumption, especially in the US, the elevated level of asset prices, particularly housing and the high and volatile price of oil. The downside risks to our forecast have thus increased."

Mr Rajan said the long-term effects of Katrina on the US was likely to be limited, but expressed concerns that the imbalances that have built up in the world's biggest economy could unwind suddenly and painfully. The US has been able to run a record trade deficit because other countries have been prepared to invest in American assets, but there was no guarantee this would continue indefinitely.

"Global capital flows and trade may have allowed economies more rope so that traditional signals, like inflation, interest rates and exchange rates, have not guided transitions so far. But, while more rope allows one to drift further, adjustments when one reaches the end of the tether tend to be abrupt."

While the fund's forecast for the global economy has remained unchanged since the spring, it said regional differences highlighted in April had become more marked. "Global current account imbalances - a key medium-term risk to the outlook - have increased yet again."

The short-term outlook remained generally solid, with the global economy proving itself "remarkably resilient to the shocks of recent years. In particular, the recovery continues to depend unduly on developments in the US and China - both of which face major adjustment challenges - and limited progress has been made in addressing the major medium-term risks to the expansion."

The fund said there needed to be a shift in demand from those countries running large current account deficits, such as the US, to those running surpluses, such as the European Union. It said the weakness of growth in the eurozone remained a source of concern. Growth forecasts for the eurozone were cut to 1.2% this year and 1.8% in 2006, 0.4 and 0.5 percentage points lower than predicted in April.